law of proportionate effect

law of proportionate effect (or Gibrat process)

an explanation of FIRM GROWTH that suggests that the proportionate growth of each firm in a market is random and independent of the size of the firm, so that the ‘chance’ that a firm will grow by a given percentage is the same whatever its size. The randomness of firms’ growth rates is a consequence of the multiple economic and chance factors that influence firms, such as effectiveness of advertising campaigns, successful launch of new products, strikes, effect of exchange rates, etc. The law of proportionate effect predicts that the size inequality of firms will tend to increase over time as a result of chance factors and so will lead to increasing concentration. This will tend to occur even if all firms have the same level of unit costs. Although chance may play some part in a firm's growth or decline, however, modern theories of firm growth (see RESOURCE-BASED THEORY OF THE FIRM) focus more on the part played by firms’ ability to create and sustain COMPETITIVE

ADVANTAGES.

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